ESG - The CEO’s code to unlock the door to corporate resilience?

A growing trend among corporations is to weigh their ESG (Environment, Social, Governance) goals against traditional commercial ones, in terms of financial metrics and business development. However, the traditional trade-off between profit and sustainability is no longer sufficient to guide businesses when the latter does not result in immediate commercial benefit. As such, companies must find ways to align their sustainability goals with profitability, rather than treating them as a zero-sum game. Long term economic gains resulting from embedding ESG across the entire fabric of corporate business strategy should be the focus.

The theme for PwC’s Global CEO survey 2023 - “winning today’s race while running tomorrow’s” highlighted the importance of a balanced agenda to effectively run the race for the future, with climate risk high on the list of CEO concerns.  Indeed the responses from CEO’s in Tanzania (TZ) and globally (GL) were not dissimilar in terms of anticipation of a moderate or large anticipated impact of climate risks to their supply chains (48% TZ, 43% GL), cost profiles (45% TZ, 49% GL), and physical assets (21% TZ, 23% GL). The survey indicated that the CEOs doing the most are the ones who feel the most exposed, and that the most prevalent actions relate to decarbonisation and innovating climate-friendly products/services; physical risk mitigation is less evident, as are initiatives to reduce carbon emission.

With new compliance requirements within the ESG space and public scrutiny, the challenge for companies is to achieve revenue growth while considering their impact on society and the environment. For instance, the EU’s Sustainable Finance Disclosure Regulation (SFDR) requires financial market participants to disclose how they integrate ESG factors into their investment decision making process. As a result, companies will need to review their current ESG initiatives and assess their effectiveness against the new standards. This pressure is real as empirical evidence shows that investors are increasingly looking to invest in companies that prioritise ESG matters, with ESG-focused investments growing rapidly in recent years (for example, as highlighted in PwC’s publication, “How CEOs can better meet investor expectations”). As investors increasingly require sustainable practices, companies with robust ESG performance are more likely to attract investors and outperform their competitors who do not prioritise ESG.

The global impact of  new mandatory ESG reporting rules (e.g. the Corporate Sustainability Reporting Directive (CSRD) in the EU and the upcoming IFRS global sustainability and climate disclosure standards effective from January 2024), is expected to be extensive. While the decision to enforce applicability ultimately lies with the local accounting institute (in our case, the National Board of Accountants and Auditors (NBAA)), the rules are widely anticipated to be compulsory for all companies operating in IFRS compliant jurisdictions. Compliance will be especially crucial for subsidiaries of companies from these regions with cross-border operations. From a Tanzanian perspective, CEO’s should expect investors, specifically foreign investors, to require ESG pre qualifications for their investments.  Indeed, a World Bank report, “ESG disclosure Toolkit for Banks and Fls” (2020) highlights the positive relationship between a company’s ESG credentials and investor confidence.

To successfully navigate this new landscape, a company's ESG strategy must align with its overall business strategy and values with its leaders taking a top-down approach to implementing ESG policies. This means that executives and boards must understand and prioritise ESG matters as a core part of their operational strategy ensuring that ESG considerations are integrated into all decision-making processes, from strategic planning to day-to-day operations. To drive accountability, companies should track and report on their ESG performance, setting clear targets and KPIs to measure progress over time. 

Further, companies must engage their stakeholders, including investors, customers, employees and local communities in their ESG efforts. This means seeking out feedback and input from these groups to identify key ESG priorities and concerns to develop and implement ESG policies. One key theme is the importance of collaboration and partnerships between governments, corporations, nonprofits and communities to drive innovation, finance large-scale projects and create enabling policies. Companies that implement ESG considerations early on, have an opportunity to reinvent their future and avoid costly adaptation and measures as we move towards a low carbon economy.

In the emerging low carbon economy, ESG is likened to a code for companies to unlock the door to resilience in the face of emerging risks but also to new opportunities for growth. Therefore, CEOs should embrace an integrated ESG strategy which is data-driven and stakeholder-focused as a forward-looking approach and investment in sustainability will better enable them to anticipate and adapt to future trends, gain a competitive edge and ensure their relevance in the evolving business landscape. The question that looms ahead is: as the tide of change is coming in - will you stay afloat or succumb to the currents?

By Dagless Kangero - Associate, Tax Services at PwC Tanzania